UPDATE 2-Britain's EU ambassador is surprise pick for Bank of England role

LONDON, July 26 (Reuters) - Britain unexpectedly named its
ambassador to the EU as the Bank of England's next deputy
governor for financial stability on Friday, moving to protect
its financial sector on the international stage.

Jon Cunliffe, 60, is a career civil servant who led British
negotiators at G8 and G20 meetings during the financial crisis,
and since January 2012 he has been Britain's top representative
in Brussels. He will start at the BoE on Nov. 1.

Cunliffe's name had not been widely mentioned as a potential
successor to deputy governor Paul Tucker, who decided last month
to step down after finance minister George Osborne selected
another outsider, Mark Carney, as governor.

Carney - previously Canada's central bank chief - welcomed
Cunliffe's appointment, saying he had got to know him in his
earlier role. Osborne said Cunliffe would help represent Britain
abroad during his five-year term at the central bank.

"His deep experience in engaging with the European Union
will be instrumental in ensuring Britain's financial services
are well represented and protected," said Osborne, whose
officials interviewed candidates earlier this month.

The global financial crisis tarnished the reputation of
Britain's light-touch banking regulation, and the government has
since toughened the rules and given the BoE the role of
financial supervision.

But the government is concerned that the slower-moving EU
process of implementing new global rules may ultimately cramp
its scope in regulating Europe's largest financial centre.

The European Central Bank, for example, will soon have
powers to regulate banks in the euro zone, with potential
knock-on effects for London.

"It will be interesting to see if the Bank will now have
more of a presence in Europe. They don't have much right now," a
Brussels-based EU diplomat said.

"In having someone who understands how European negotiations
work, at which points you engage and what you have to be ready
for ... it's a significant gain for the UK," he added.

Cunliffe has only been in Brussels for 18 months. Some of
his foreign counterparts there said they often turned to him at
their weekly meeting for a detailed explanation of finance or
global markets, drawing on his experience in handling crises
including the collapse of Britain's Northern Rock bank.

"When you take a negotiating position he will tear it to
pieces and put it back together again so you feel you have
really been grilled. He has worked with Carney and they know
each other well," the diplomat said.

INTERNATIONAL EDGE

In a previous role at the finance ministry Cunliffe observed
the bank's monetary policy meetings, but he has made no public
comment on his own current views.

His international background may have given him an edge over
potential internal contenders for the deputy role such as BoE
markets director Paul Fisher and financial stability director
Andy Haldane.

"He wasn't on the list of front runners for the job but his
CV fits the bill," said J.P. Morgan economist Malcolm Barr.

Cunliffe will serve on the BoE's Financial Policy Committee,
which sets the tone for financial regulation, the board of the
BoE's Prudential Regulation Authority, which runs day-to-day
regulation of banks, and the Monetary Policy Committee.

Some had mixed feelings about his long service at Britain's
finance ministry and previous close working relations with prime
ministers Gordon Brown and David Cameron, as well as his lack of
first-hand financial markets experience.

"One could argue that more coordination between monetary and
fiscal policies is precisely what is required in current times.
But too close a relationship with the politicians may not be a
good thing," wrote HSBC economists Simon Wells and John Zhu.

"As deputy governor ... a key skill is an understanding of
the workings of banks and other financial institutions. On this,
Sir Jon is perhaps more of an unknown quantity," they added.

Tucker, who has spent his entire career at the BoE, has
expressed strong views on banks' need to hold more capital and
to be able to be broken up easily if they get into trouble.

However, some in government fear the BoE's approach to bank
capital is holding back economic recovery.

In a statement released just before news of Cunliffe's
appointment, Tucker said he would step down on Oct. 18 and take
teaching and research fellowship at Harvard University.